Homebuyer Tax Credit: Update

By James Kwak

Calculated Risk says there is a deal (bullet points are from his post):

• Income eligibility for first-time home buyers stays at $75,000 for individuals, and $150,000 for couples.
• For move-up buyers, income eligibility is $125,000 for individuals and $250,000 for couples.
• There is a minimum 5 year residency requirement – in their current home – for move-up home buyers.
• The tax credit is the lesser of $7,290 or 10% of the purchase price.
• The credit runs from Dec. 1, 2009 to April 30, 2010, with an additional 60 day period to close escrow. (So end of April to sign contract, end of June to close escrow)
• Expect bill to be signed by Friday, packaged with the unemployment benefit extension.

So my wife and I fit under the $250,000 couples limit. We’ve lived in our house for eight years. So now the government is willing to give me $7,000 to buy a new house? That would be a sale that wouldn’t have happened otherwise — but what good would it do the economy?

As I tried to explain previously, an $8,000 credit for first-time homebuyers will raise prices by less than $8,000 (leaving aside the effect of leverage for simplicity), because demand at any price point only goes up for first-time homebuyers, not all homebuyers. That means that the buyer gets a fair chunk of the subsidy. But vastly expanding eligibility like this (about 67% of households own houses, and probably about half of them have been in the same house for five years) increases the amount by which prices will go up, which lowers the buyer’s share of the subsidy and increases the seller’s share.

Comments

[GotDOCG:]

In the entire history of the United States there has never been an economic crisis that had its roots in residential real estate... to be sure it has always been effected, but never before the cause.. Everything that the government has implemented to date are attempts to cure a top down recession... can not work.

Immediate, realistic loan modification designed to keep people in their homes is the only solution to the free fall. Without exception, every program, HAMP included, will be failures. Lenders are still demanding that homeowners first go 60 days delinquent before they will even commence any consideration... That is a 180 point hit to a credit score... Immediately followed by the credit card issuers implementing Universal Default, lowering credit lines to just above the amount currently owed... another 40-60 point hit... The overall effect is that a once stellar "800" score has now been dropped, no pounded down to a low-mid 500 score... now how does anyone expect consumers to do just that, consume, in the numbers that are required to spur on the economy... what sort of GM car can be bought with that new found FICO score??!! Thus with these new found credit scores is it any wonder why we are now headed towards a commercial real estate crash...I

Oct 28 11:55 AM

[Michael Clark:]

The free fall is actually the thing that will save us. Housing appreciates historically an average of 2-3% per year. In some places housing appreciated 200% in 5 years. Now we want to keep that inflation from being wound down, when winding in down would help the economy much more in the long run than encouraging more debt when we are already toxic with personal debt and government deficits.

This $8,000 discount should be given by the sellers of overpriced housing, not by taxpayers. I don't want to be buying an overpriced house for someone I don't know (and I have been a taxpayer for many years).

Lower housing prices are NOT the problem, they are the ANSWER.

Oct 28 12:03 PM

[Living4Divi...:]

It's about time that they a) renew the program and b) extend the program to include step-up buyers (those selling one house and buying another)

So far, the US Govt has bailed out:
1. The banks (to the tune of 700B+ as well as 7T in loan guarantees
2. The credit card companies (buying credit card receivables)
3. Detroit (The GM bailout #1, Cash-For-Clunkers, possible bailout #2)
4. Foreign Central Banks with currency swaps.

The only thing they have done for homeowners is a $8000 credit.
$8000 for a $160,000 house is 5% of the purchase price
$4500 for a $18,000 car is 25% of the purchase price.

According to the government, cars are more important than houses. When the banks foreclose on the houses, the people can sleep in their shiny brand new cars.

I am glad they upgraded and renewed the program, however they have lowered the credit limit. They arent doing enough to help the housing market. Everyone has been bailed out except homeowners.

Oct 28 12:18 PM

[MyrEnforker:]

Sure, they care about homeowners, but that's not the prime reason. It gives the banks more time to repair their balance sheets.

This is STILL ultimately all about the banks.

Oct 28 12:35 PM

[balor123:]

Homeowners have been bailed out through subsidized low interest rates and that has actually been the most expensive of the bailouts ($1 trillion!), most of which has already been spent. Few like the existence of the mentioned bailouts. You should be equally unhappy about the homeowner bailout as it does not justify the other bailouts - rather it creates a further injustice! Sucks to be a renter. Great to be a homeowner who never needed help in the first place. Others? Well at least they made the choices that got them where they are. Maybe we should help them but they certainly don't deserve it.

The new home bailout does even less for housing. It is easily gamed. 1) buy a similar house and get $8k, 2) trade houses with a relative then immediately trade back ($8k each), or 3) trade down now that you can't afford the house that you're in, get $8k. Who wins in these cases? People who collect fees. People who own houses (and are smart enough to take advantage of them).

Oct 28 12:38 PM

[sticktoitiv...:]

GotDOCG

If you need a load modification you shouldn't be buying a new car or running up your credit cards.

Oct 28 01:11 PM

[sidney:]

I think the economic concept that housing prices increase by the amount of the subsidy is way off base in this scenario. My experience in applying the first time home buyer credit was to sit back and watch the housing price of the house I was considering fall about 10k every 2 weeks before I pulled the trigger... the house cost 290K to build and I bought it for 177.5 and was sent a check for 8K+interest by the gov't. There was no evidence that the housing price increased due to this credit. What DOES HAPPEN is that after I bought the home I spent money. I hired a gardener to touch up the lawn(weeding, mulching, etc), I bought shades, I bought kitchen stuff. Hunter Douglas loves me. Bed Bath and Beyond loves me. Home Depot Loves me. Never mind whether the home buyer credit will simply adjust prices up by the credit... this bill is designed to kick people off their lazy renting butts and spend money like mad like every other home buying fool and at least temporarily revive the economy with real demand. The supply of too many homes is the problem for home prices and to probably the home buyer credit won't solve that so I don't expect prices to rise instantly upon the credit being extented. What does seem strange though is if it is extended to move-up's then maybe it becomes a bewildering mess of musical chairs.... at the very least folks might switch homes to get the $ to pay for the refinancing at these crazy low FHA rates... The winners might end up being Uhaul and other movers in the great move-up of 2010...

Oct 28 01:17 PM

[j-dub:]

Nine wrongs don't make a right.
Saying that ten wrongs is only fair, is upsurd.

Don't overpay for a house using my money.

We have a socialist society emerging from a captalistic one.
The only way to bring back capitalism is let these programs fail.
What happened to free markets?
THIS IS NOT MY AMERICA


On Oct 28 12:18 PM Living4Dividends wrote:

> It's about time that they a) renew the program and b) extend the
> program to include step-up buyers (those selling one house and buying
> another)
>
> So far, the US Govt has bailed out:
> 1. The banks (to the tune of 700B+ as well as 7T in loan guarantees
>
> 2. The credit card companies (buying credit card receivables)
> 3. Detroit (The GM bailout #1, Cash-For-Clunkers, possible bailout
> #2)
> 4. Foreign Central Banks with currency swaps.
>
> The only thing they have done for homeowners is a $8000 credit.
>
> $8000 for a $160,000 house is 5% of the purchase price
> $4500 for a $18,000 car is 25% of the purchase price.
>
> According to the government, cars are more important than houses.
> When the banks foreclose on the houses, the people can sleep in their
> shiny brand new cars.
>
> I am glad they upgraded and renewed the program, however they have
> lowered the credit limit. They arent doing enough to help the housing
> market. Everyone has been bailed out except homeowners.

Oct 28 01:33 PM

[robert.b.fe...:]

I sure hope that the credit will apply to land without any structure on it. I've been looking at some nice properties up New Mexico way and it would be just dandy if all of you chipped in to help pay for it. 1-800-big-land, I'm not making this up.

Oct 28 03:49 PM

[Duude:]

The first time homebuyer tax credit is some of the worst legislation to come around in quite a while. It doesn't do what it was advertised to do. First of all, first time homeowners are very rarely buying high end homes. Typically they buy low end homes, and in fact $8000 credit won't influence anyone to buy a more expensive home, though no one will turn it down of course. The low end market isn't in need of a big influx of homebuyers. The tax credit is really more a gift to home builders who are otherwise out of work being that the home market is flooded with bank owned homes ready for the market. As things stand now we're coming to the end of the time period for qualifying for the tax credit but new buying of these same homes had already dried up anyway. The fact of the matter is this economic rebound strategy is a waste of taxpayer money and useless in the face of millions of homes valued out of range of first time homebuyers. What the real estate market really needs is a rebounding job market and time.

Oct 28 05:06 PM

[bobbyvelvet:]

Many move up buyers will need to sell their homes to buy, hopefully they will be asking a reasonable price, good luck selling!

Oct 28 05:17 PM

[Living4Divi...:]

Hmmm .. alot of thumbs down on that comment. I guess people dont like the homebuyers credit.


On Oct 28 12:18 PM Living4Dividends wrote:

> It's about time that they a) renew the program and b) extend the
> program to include step-up buyers (those selling one house and buying
> another)
>
> So far, the US Govt has bailed out:
> 1. The banks (to the tune of 700B+ as well as 7T in loan guarantees
>
> 2. The credit card companies (buying credit card receivables)
> 3. Detroit (The GM bailout #1, Cash-For-Clunkers, possible bailout
> #2)
> 4. Foreign Central Banks with currency swaps.
>
> The only thing they have done for homeowners is a $8000 credit.
>
> $8000 for a $160,000 house is 5% of the purchase price
> $4500 for a $18,000 car is 25% of the purchase price.
>
> According to the government, cars are more important than houses.
> When the banks foreclose on the houses, the people can sleep in their
> shiny brand new cars.
>
> I am glad they upgraded and renewed the program, however they have
> lowered the credit limit. They arent doing enough to help the housing
> market. Everyone has been bailed out except homeowners.

Oct 28 06:11 PM

[Socialism c...:]

Somewhat about the banks. But there's more: it's also about taxation...propping up home prices to keep property taxes from dropping too much; and it's about buying votes with handouts...making fewer people feel ticked off about bank bailouts by they themselves having received a little something. It's ALL wrong to have done in the end.


On Oct 28 12:35 PM MyrEnforker wrote:

> Sure, they care about homeowners, but that's not the prime reason.
> It gives the banks more time to repair their balance sheets.
>
> This is STILL ultimately all about the banks.

Oct 28 06:32 PM

[TheSnail:]

Are you sure you understand the basics of our financial system?

It is called the VELOCITY of MONEY!!!!!!!!!!!!

Oct 28 06:52 PM

[The Geoffster:]

Here's the rub. It won't work and will only make the day of reckoning worse. If the FED fails in its efforts to induce inflation, we will witness the mother of all collapses. Anyone with anything left, better head for the hills.

Oct 28 06:57 PM

[enigmaman:]

nationally home prices have fallen to the 2003 level which was right about when the increase in appreciation began, so we are back at the pre boom levels, interest rates are also below what was offered at the time. The problem is not pricing or rates, its now tougher mortgage qualification guidelines and under appraisals and scared lenders and no secondary market, and then there is the problem of the economy and a cloudy future, other then that its all good.


On Oct 28 12:03 PM Michael Clark wrote:

> The free fall is actually the thing that will save us. Housing appreciates
> historically an average of 2-3% per year. In some places housing
> appreciated 200% in 5 years. Now we want to keep that inflation
> from being wound down, when winding in down would help the economy
> much more in the long run than encouraging more debt when we are
> already toxic with personal debt and government deficits.
>
> This $8,000 discount should be given by the sellers of overpriced
> housing, not by taxpayers. I don't want to be buying an overpriced
> house for someone I don't know (and I have been a taxpayer for many
> years).
>
> Lower housing prices are NOT the problem, they are the ANSWER.

Oct 28 07:09 PM

[bricki:]

I don't think the home buyer credit is doing anything but drying up the inventory of entry level homes. I haven't seen any indication that it has helped prices (the big actor there is interest rates keeping resets from going through the roof).

So is drying up that inventory doing any good? Maybe it's helping the banks a bit - owning all these homes can't be good for a bank.

Is it a good program? Can't see why just helping the banks directly vs. indirectly makes any difference. Except maybe this is something politicians like because they can say to voters they gave them free money (yes many voters would believe that).

Do I like the program? Well for me personally it's a help because it's helping grease the wheels a bit because my family is selling an entry level home because of a life event.

Otherwise it makes little sense.

Oct 28 08:44 PM

[j-dub:]

Geoffster-
You seem like a smart fellow
Just tell me which hill I should head for and I'm there!!!!


On Oct 28 06:57 PM The Geoffster wrote:

> Here's the rub. It won't work and will only make the day of reckoning
> worse. If the FED fails in its efforts to induce inflation, we will
> witness the mother of all collapses. Anyone with anything left, better
> head for the hills.

Oct 28 10:52 PM

[billddrummer:]

I'll reiterate what I said on a local real estate thread:

If this passes the way it's proposed, it will prop up the prices of higher priced homes and reduce the availability of lower priced homes--exactly the opposite of what the government says it wants to happen.

Case in point--if you buy a $150,000 house, the credit will be $7,290. If you buy a $700,000 house, the credit will be $7,290.

Oct 29 01:41 AM

[RatWatcher:]

'Sucks to be a renter. Great to be a homeowner who never needed help in the first place.'

Sucks to be a landlord (read: homeowner) losing a good renter thanks to the $8K Cash-For-Foreclosures handout.

Oct 29 02:06 AM

[lower98th:]

At least if the banks think this is the best they're going to get, foreclosure inventory will be listed into this credit over the winter, rather than held for the next, better bailout.

Good program for the builders and bank sellers, as these credits increase activity, sales, and prices on the sell side to a greater degree than they help on the buy side.

The smart money is staying on the side until the government programs run their course. We will see who outlasts whom.

Oct 29 09:53 AM

[BRUCE E. W.:]

Apparently the market has decided that YOU are the failure. I suppose you should accept it gracefully since it is the verdict of the market that you profess will always correct itself. When its you...its different? THIS IS THE MARKET WORKING. GO FIGURE!


On Oct 28 01:33 PM j-dub wrote:

> Nine wrongs don't make a right.
> Saying that ten wrongs is only fair, is upsurd.
>
> Don't overpay for a house using my money.
>
> We have a socialist society emerging from a captalistic one.
> The only way to bring back capitalism is let these programs fail.
>
> What happened to free markets?
> THIS IS NOT MY AMERICA

Oct 29 10:36 AM

[richcam:]

Its immoral to take money from one segment of the population by force and give it to another. Taxpayers / Savers supplementing 1st time or any other sort of buyer. We have lost our minds ! The real tragedy is that we are actually stealing money from our kids and grandkids. Little by little since FDR we have sold out our principles for our pleasure.

"Anyone who would trade an ounce of principle for a pound of popularity has made a terrible deal"..-- Ronald Reagan.

Oct 29 04:00 PM

[Chancer:]

Federal government is behaving like someone planning on declaring bankruptcy: running up their debt, because they know they will not have to pay.

Oct 29 04:52 PM